Sales of single-serve coffee pods in the US continue to grow, but the pace will slow in coming years as the maturing category enters a tumultuous period fraught with increased competition that could compress prices and margins, market research suggests.

“Single-cup coffee continues to play an increasingly larger role in retail coffee sales,”​ capturing 37.4%, or $3.43 billion of the total $9.17 billion in retail coffee sales in the 52 weeks ending July 12, 2015, according to a recent report from Packaged Facts​.

The report author, Kaleidoscope Research Consulting, predicts in the back half of 2015, the sale of coffee pod will have picked up an additional 2.6 percentage points of retail packaged coffee sales, which it estimates should have reached $40.9 billion.

However, it adds, the 18.4% year-over-year growth of pod sales from 2014 likely will not be sustained in coming years. Rather, it predict, sales will climb only 16.2% in 2016, 14.5% in 2017 and 13.5% in 2018. What is more, the report authors expect units sold to grow faster than sales due to gradual price compression.

Factors contributing to slowdown​

The slowdown in sales and price compression in the next few years can be attributed in part to Keurig Green Mountain’s rocky transition to the Keurig 2.0 platform, according to the report. This stumble by a major player in the category “resulted in lower uptake of single-cup brewers, which in turn crimped single cup portion pack sales,”​ it said.

The wobbly launch also created a foothold for other brewer manufacturers to compete against Keurig, which actually could boost unit sales by increasing household penetration, Packaged Facts added.

Even though demand likely will increase, a broader influx of brands into the single-cup space, along with Keurig’s push into the private label space, will increase the price gap between the different brands and private label pods, which in turn could drive down all prices and compress margins, the report cautions.

This threat likely is not as fierce as it might appear on first blush, though, according to the report.

“With a cost per pound that remains well above other coffee categories, single-cup coffee can arguably withstand a bit of a price compression. Indeed, single-cup coffee commands a retail price per pound that is 4.5 times higher than that of ground coffee and about three times that of whole bean coffee. So, while single-cup contributes only 12.9% of combined ground, whole bean, instant and single cup coffee volume, it generates 29.1% of unites and 37.5% of sales,”​ the report details.

Innovation could drive unit sales​

Despite a projected sales slowdown, emerging innovations in pod content, packaging and targeted consumer demographics will help keep year-over-year sales aloft in the strong double digits in the next few years, the report predicts.

“Opportunity exists to lure a more diverse demographic into the single-cup fold with coffee beverages that they … already use,”​ including more flavors and brands, according to Packaged Facts.

The report notes that currently single serve pods skew towards white households, with a 27.7% penetration compared to 23.6% of the total population and only 14.4% of Hispanic households.

“Up to now, single-cup beverages have left Hispanic and Latino consumers behind – providing little encouragement for them to engage with single-cup brands,”​ the authors note. They suggest migrating more Hispanic brand favorites to pods to “incent them to use this higher-margin coffee type.”​

These brands include Nesecafe Dolce Gusto, Café Pilon and Café Goya. Café Bustelo is another favorite and is off to a solid start with $15.5 million in annual IRI MULO sales through July 7, 2015, the report notes.

It also points out that “Asian respondents seek out espresso-based coffee beverages,”​ and “flavor variety may be the gateway into Black households.”​

The development of non-coffee pods, such as for craft soda, cocktail mixers, soups and oatmeal, also could increase the appeal of the brewers, which in turn would increase household penetration and likely coffee sales, the report suggests.

More environmentally friendly packages​

Innovative packaging that addresses consumer concerns about the waste pods generate also could help boost sales, suggests Package Facts. It sites proprietary research that found 33% of consumers strongly agree that they would use coffee more if they were recyclable.

Several players already are addressing this issue, including Rogers Family Company San Francisco Bay Gourmet Coffee, East West Tea Company and Cameron’s Handcrafted Coffee​.